Related News

Hopes for interoperability as DSI finalises digital trade document standards

“Wake-up call”: LEIs could cut trade costs by US$100bn, industry argues

FSB fires warning to commodity traders over liquidity risks

Banks must adapt to survive as commodity finance demand slumps

Yap departs MonetaGo, returns to banking

The International Chamber of Commerce (ICC) has published a framework for the trade finance industry as it grapples with the challenge of better serving smaller businesses.

The document, titled Reconceiving the Trade Finance Ecosystem, sets out a road map for digitally connecting and facilitating interoperation among existing trade finance networks through sets of shared standards, processes, protocols and guiding principles.

It has been produced by the ICC’s CEO advisory group on trade finance (ATF), which was established in September last year after warnings from the global business organisation that the supply of trade credit to SMEs and emerging markets was at significant risk amid the Covid-19 pandemic.

Introducing the framework, the ATF says: “The US$5.2tn global trade finance system doesn’t work as it should for micro, small, and medium enterprises. MSMEs encounter gaps in financing of an estimated US$1.7tn and rejection rates of up to 40%. This leaves over 65 million MSMEs credit constrained, although MSMEs are critical to the health of global trade and 600 million new jobs are needed by 2030 to absorb the global workforce, with developing economies the worst affected.”

Adding that resolving this issue is “critical for the policy makers of the world, for all players in the global trade system, the health of the future world economy, and the goal of financial inclusion”, the ATF puts forward a model based on research carried out with McKinsey and Fung Business Intelligence, that it says could serve as the foundation for a new vision of a modernised global trade finance ecosystem – one that is fit for purpose.

“The difficulties faced by small businesses in accessing trade finance have almost become an accepted facet of international commerce since the global financial crisis,” says John Denton, ICC secretary general. “If we want to enable trade as a real vector of peace and prosperity in the wake of Covid-19, it’s time to stop applying sticking plasters and tackle the need for wholesale reform and effective digitalisation of a market which is currently unable to serve the needs of the real economy.”

To achieve this, the ATF is taking aim at the fragmented state of today’s trade finance system, which is characterised by a complex web of decades-old manual processes, as well as more recent, isolated “digital islands” – closed systems of trading partners formed to address specific pain points.

The construct set out in the report would be built on three main logical blocks: first, digital trade enablers, which would be standards enabling digitisation of both trade finance and global trade at large; second, standards enabling specific digitisation of the trade finance industry; and third, best practices for trade finance interoperability. It also calls for governance to be provided by a single global industry entity or by a consortium.

Among digital trade enablers, the report points to globally recognised company identifiers including the legal entity identifier (LEI), as well the standards for digital trade documents currently being championed by the ICC’s Digital Standards Initiative, such as the Digital Container Shipping Association’s data and process standards for the electronic bill of lading.

On the second topic – that of standards enabling specific digitisation of the industry – the report underscores that there is still some work to be done, particularly around trade finance APIs and uniform trade finance data models. It also points to the need for a trade finance product taxonomy.

“The highly specific nature of trade finance subject matter has led to the adoption of a range of expressions and terms that are often inconsistent, opaque, and even contradictory,” the report says. “For instance, ‘supply chain finance’ covers a wide range of products, programmes, and solutions in the financing of commerce, including international trade.”

The report acknowledges the work done in this regard by the Global Supply Chain Finance Forum (GSCFF) in its 2016 Standard Definitions for Techniques of Supply Chain Finance document, and calls for an industry-wide consensus on the terms used to describe all trade finance products and solutions, in order to create what it says would be an efficient and truly interoperable ecosystem.

The third logical block, that would overlay the preceding two, encompasses what the group calls “blue books” for trade finance processes and workflows, as well as guiding principles for sustainable trade finance.

“We are proposing real-world solutions, many of which already exist in some form, to address long-standing issues in global trade finance,” says Bob Sternfels, global managing partner of McKinsey. “The report sets out a global framework for existing and future standards, protocols, and principles, with the goal of connecting all those who participate in the global trade finance ecosystem to both present and future networks.”

He adds that this will be a “complex project”, but stresses that its benefits would be both wide and deep, with the prize being “a global economy that is more sustainable and inclusive”.

“The first step in bringing this vision to reality has already been taken,” the ATF says. “Over the past year, the ICC has – through the ATF – secured contributions of expertise, ideas, and efforts from many trade participants, which have shaped the proposed model.”

The next step, the ATF says, is for all parties in the trade ecosystem to align with each other in order to contribute to the development, execution, and promotion of the target vision.